The High Court held, in The Software Incubator v Computer Associates [2016] EWHC 1587 (QB), that a supply of commoditised software is a sale of goods for the purposes of the Commercial Agents (Council Directive) Regulations 1993 (“Regulations”).

Background

Computer Associates UK Ltd (“CA”) entered into a non-exclusive agreement with The Software Incubator Limited (“TSI”). TSI agreed to provide software consulting and promotion services in return for a fixed monthly fee and commission on sales.

TSI’s director was unhappy with the relationship and decided to become an agent for another company (“the company”), which led to TSI signing an agreement with them. TSI intended to terminate the agreement with CA, but CA served three months’ notice of termination on TSI in September 2013. However, CA then decided to terminate the agreement earlier and with immediate effect, alleging that TSI’s work for the company amounted to a repudiatory breach. TSI claimed compensation under the Regulations, commission on post-termination sales, and damages.

CA argued that the Regulations did not apply because (i) a supply of software could not qualify as a sale of goods for the purposes of the definition of “commercial agent” in the Regulations; (ii) TSI’s actions as a commercial agent were “secondary”; and (iii) TSI was in repudiatory breach of the agreement, and therefore no contractual damages or other compensation could be claimed.

Judgment

The Court accepted that software does qualify as goods for the purposes of the Regulations and held, also, that the breaches TSI had committed were minor and not repudiatory. In doing so, the Court said:

  • A separate definition of the sale of goods for the purposes of the Regulations is desirable to help clarify the law.
  • Software should be interpreted as goods where it is treated in the same way as other tangible goods.
  • There is no reason why software should be tangible for it to qualify as goods.
  • Other jurisdictions, including New Zealand, consider a sale of software to be a sale of goods.
  • The software is “commodified” (“capable of transfer and commercial exploitation”), so it would be normal to refer to it as a product rather than a service.

Summary

This is a landmark decision. The judgment departs from traditional interpretations of the definition of goods found in the Sale of Goods Act 1979, affording software agents statutory protection. The Court’s approach in this case demonstrates that the Regulations do not prevent software being treated as goods. Also, the grant of a perpetual license of software can be treated as a sale.

Historically, software could only qualify as goods where it was, for instance, combined with hardware. The Court adopted a modern day interpretation and appears to have lifted the restrictions in the digital age. This sends a message out to software companies who should now consider minimizing their exposure under the Regulations when they engage with agents.